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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-22071
OVERLAND DATA, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3535285
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
8975 Balboa Avenue, San Diego, California 92123-1599
(Address of principal executive offices, including zip code)
(619) 571-5555
(Registrant's telephone number, including area code)
________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of September 15, 1997 was $35,477,000 based on the closing price
reported on such date by the NASDAQ National Market System. Shares of Common
Stock held by officers and directors and by persons who hold 5% or more of the
outstanding Common Stock have been excluded from the calculation of this amount
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive.
As of June 30, 1997, the number of outstanding shares of the registrant's Common
Stock was 10,435,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed in connection with registrant's 1997
Annual Meeting of Shareholders to be held on November 11, 1997 (the "Proxy
Statement") are incorporated herein by reference into Part III of this Report.
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PART I
THIS REPORT CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE PERFORMANCE OF THE COMPANY. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS,
PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS IDENTIFIED IN
THIS REPORT, INCLUDING THE MATTERS SET FORTH BELOW UNDER THE CAPTION "RISK
FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
ITEM 1. BUSINESS
Overland Data, Inc. (herein "Overland Data", "Overland" or the "Company")
designs, develops, manufactures, markets and supports magnetic tape data storage
systems used by businesses for backup, archival and data interchange functions
with mini-computers, workstations, PC/LAN (Microsoft Windows NT and Novell
Netware) and UNIX client/server networks, and personal computers. The Company's
primary products, automated tape libraries, combine electro-mechanical robotics,
electronic hardware and firmware which are developed by the Company with an
emphasis on efficiency of design, functionality and reliability. The Company
offers three product lines which are all based on one-half inch, linear magnetic
tape technologies and, with the exception of the tape drives in its
LibraryXpress product line, are designed and manufactured in-house. It also
distributes products manufactured by other original equipment manufacturers
("OEM's") and markets various other products, including controller cards which
connect its tape drives to personal computers, interchange software developed by
the Company, storage management software supplied by third parties, spare parts
and tape media.
PRODUCTS
The Company produces tape drives, tape loaders and automated tape libraries
based on removable tape technologies. It currently provides turnkey data
storage solutions to customers in distinct markets through three product lines
that utilize three generations of half-inch magnetic tape technologies. The
network backup market is served by LibraryXpress, the Company's DLT-based
automated tape library product line, which provides automated backup as
companies migrate to enterprise-wide client/server networks. The mid-range data
interchange and backup market is served by TapeXpress, the Company's 18/36-track
product line. The desktop data interchange market is served by TapePro, the
Company's 9-track product line, which targets personal computer and workstation
users who need access to data created on legacy systems.
- - LIBRARYXPRESS - The LibraryXpress product line of automated tape
libraries is based on DLT technology and tape drives supplied by Quantum
Corporation. In March 1996, the Company commenced shipment of the LXB
base unit, which consists of one or two DLT drives and a ten-cartridge
removable magazine. The Company currently offers the LXB with 2000XT,
4000 or 7000 DLT tape drives. During the third quarter of fiscal year
1997, the Company commenced shipment of (i) the LXG global control
module which provides an additional 16-cartridge magazine, library
control from a single point and the ability to modularly stack up to
eight LXB or LXC capacity modules, and (ii) the LXC capacity module
which consists of a 16-cartridge magazine and no drives. The LXG enables
users to pass cartridges from module to module as one integrated unit,
providing true scalability and allowing end-users to expand their
storage capacity to meet their growing business needs while protecting
their original LXB investment. In May 1997, the Company began shipping
the LXS MiniLibrary, a single-drive, non-scalable version of the
LibraryXpress to serve the lower end of the network market.
- - TAPEXPRESS - The TapeXpress product line of 18/36-track drives and
loaders is based on IBM's 3480/3490/3490E technologies. The installed
base of 3480 and 3490 drives and cartridges is very large and their
primary function currently is for data interchange. Based on the size
of this installed base and the mature nature of this technology, the
Company considers its 18-track products to be legacy products. The
Company's T490E, L490E and L60E products are compatible with the
36-track IBM 3490E format, are used extensively on AS400 and RS6000
minicomputers, and are the only products in the marketplace that are
capable of reading and writing in both 18 and 36-track formats.
Overland's products connect easily to numerous hardware platforms and
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are supported by many popular backup and hierarchical storage management
("HSM") software packages. During fiscal year 1997, IBM selected the
Company to be its supplier of 36-track products.
- - TAPEPRO - The TapePro product line consists of compact, lightweight and
low-cost desktop tape drives, and a legacy tape drive sold primarily to
Digital Equipment Corporation ("DEC") for replacement purposes.
Nine-track tape once was the only tape technology used for archive,
backup and data interchange functions. Today, 9-track tape is used only
for data interchange, a limited function used to access data that
generally was stored when 9-track was the only tape technology. Data
interchange continues to be important for end-users who need to access
data on the estimated 250 million 9-track reels worldwide. Although new
information currently is not stored on 9-track tape, end-users need to
access information stored on these tapes periodically and it generally
is not cost-efficient to transfer this information to another storage
medium. The Company has not recently, and will not in the future, invest
additional research and development resources in the 9-track product
line.
Each of the Company's products is installed on specific computer platforms
with the appropriate backup, data interchange or storage management software.
Overland actively works with a number of backup and storage management software
companies to confirm that its products are properly supported. Currently, more
than 40 different software packages support the Company's products. For
instance, on the Novell Netware and Microsoft Windows NT platforms, the software
packages include products from Cheyenne Software, Seagate Software, Inc. (Arcada
and Palindrome), Legato Systems Incorporated ("Legato Systems"), and STAC Inc.
On UNIX platforms, the software packages include products from Legato Systems,
IBM, Cheyenne Software and Peripheral Device Corporation.
SALES AND MARKETING
The Company sells its products through four channels: (i) original
equipment manufacturers ("OEM"), (ii) volume, consisting of systems integrators,
technical distributors and value added resellers ("VARs"), (iii) resellers, and
(iv) end-users. Overland's products are sold both domestically and
internationally. Currently, a significant portion of its 9-track, 18-track and
36-track products are sold through the OEM channel, principally to IBM and DEC.
Regardless of the channel through which they are sold, all of Overland's
products are designed and manufactured to meet OEM level requirements and
reliability standards. Because the OEM qualification process can take six to 18
months to complete, the Company's initial sales of new products are often made
to other volume and reseller customers and end-users, which typically evaluate,
integrate and adopt new technologies and products more quickly. After
qualification and acceptance, OEM sales generally represent an increasing
proportion of a product's unit sales and are important to the Company in terms
of validating its products in the marketplace and achieving desirable production
volume.
- - OEM CHANNEL - The Company currently has supply agreements with Groupe
Bull S.A., DEC, IBM, Intergraph Corporation, NCR Corporation and Symbios
Logic, Inc., all of which incorporate Overland's products into their
system offerings. Subsequent to June 30, 1997, the Company also entered
into a supply agreement with Siemens Nixdorf Informationssysteme AG in
Europe and expanded its agreement with DEC to cover all three of
Overland's product lines. Overland often works with its OEM customers
early in a new product development cycle in order to design its products
to meet their specifications. The OEM sales cycle is often lengthy and
typically consists of a general technology evaluation, qualification of
product specifications, verification of product performance against
these specifications, integration testing of the product within the
customers' systems, product announcement and volume shipment. As is
typical in the industry, the Company's OEM contracts provide for annual
price reviews and the customers are not required to purchase minimum
quantities. DEC has been the Company's largest customer, accounting for
approximately 14%, 23% and 21% of sales in fiscal years 1997, 1996 and
1995, respectively. Shipments to IBM accounted for just over 10% of
sales in fiscal 1997. No other customer accounted for more than 10% of
sales in any year during the three-year period. The Company supports
this channel through a field sales office and other Company field
representatives.
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- - VOLUME CHANNEL - The Company's volume channel includes systems
integrators, technical distributors and VARs, each of which sells to
both resellers and end-users. Certain of the Company's volume channel
customers specialize in the insurance, banking, financial, geophysical
and medical industries, and offer a variety of value-added services
relating to the Company's products. Overland's products frequently are
packaged by these customers as part of a complete data processing system
or combined with other storage devices, such as redundant array of
independent disks ("RAID") systems, to deliver a complete storage
subsystem. These customers also recommend the Company's products as
replacement solutions when backup systems are upgraded, and bundle its
products with storage management software specific to the end-user's
system. The Company supports this channel through a field sales office
and other field representatives.
- - RESELLER AND END-USER CHANNELS - The Company maintains internal
capabilities to serve end-user customers when its other channel partners
are unable to do so, even though the end-user channel as a percentage of
sales is decreasing. The Company supports this channel through its
in-house sales force. The Company believes that direct sales and
contact with end-users and the resellers which sell to them, provide the
Company with important information about the performance of its products
on various platforms and with various software applications.
- - INTERNATIONAL BUSINESS - The Company has a wholly-owned subsidiary
located in Wokingham, England which provides sales, technical support,
repair and manufacturing integration for the European marketplace. The
Company assigns to its international distributors the right to sell
Overland's products in a country or group of countries. These
distributors then sell the Company's products to systems integrators,
VARs and end-users. In addition, many domestic customers ship a portion
of the Company's products to their overseas customers. Sales personnel
are located in various cities throughout Europe, while sales personnel
located in the Company's corporate offices serve the Pacific Rim, South
America, Australia, New Zealand and Mexico. Export sales by the
Company, principally in Europe, for the years ended June 30, 1997, 1996
and 1995 were approximately $14,391,000, $12,775,000 and $7,737,000,
respectively.
Overland supports its sales efforts with various marketing programs
designed to build the Company's brand name and attract new customers. Its
channel partners are provided with a full range of marketing materials,
including product specification literature, software connectivity information
and application notes. The Company's management and engineering personnel work
with the channel partners to provide support and, in certain instances, visit
potential customer sites to explain and demonstrate the technical advantages of
the Company's products. In addition, the Company holds two conferences each year
to inform its channel partners of new product developments and programs and to
discuss emerging trends in their markets. The Company also maintains press
relations both domestically and in Europe, advertises in computer systems
publications targeted to its channels and offers market development funds to all
of its channel partners except for OEM customers and end-users. Overland
participates in national and regional trade shows both domestically and
internationally and displays its products at the CEBIT show in Europe and
domestically at COMDEX, NetWorld/InterOp and AIIM. The Company also maintains a
World Wide Web site (http://www.overlanddata.com), which features marketing
information, includes news releases and product specifications, and has a
computer BBS from which customers can download application, service and
technical support notes.
CUSTOMER SERVICE AND SUPPORT
Overland's technical support personnel, located both in its headquarters
facility and its U.K. office, are trained with respect to the Company's products
and assist customers with "plug-and-play" compatibility between multiple
hardware platforms, operating systems and backup, data interchange and storage
management software. The Company's application engineers are available to solve
more complex customer problems and visit customer sites when necessary.
Customers that need service and support can contact the Company through its
toll-free telephone lines, facsimile and Internet e-mail.
The Company's standard warranty is a two-year return-to-factory policy
which covers both parts and labor. For products that it distributes and for
drives and tapes used in the Company's products that are manufactured by a third
party, the Company passes on to the customer the warranty provided by the
manufacturer. The Company also
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offers on-site service for certain of its products, including 24-hour
service, seven days a week, for which it contracts with third-party service
providers.
COMPETITION
The worldwide tape storage market is intensely competitive as a large
number of manufacturers of alternative tape technologies compete for a
limited number of customers and barriers to entry are relatively low in the
library category. The Company currently participates in three market areas
which are defined by different tape technologies: (i) network data storage;
(ii) data backup and interchange based on IBM compatible 3480/3490
technology; and (iii) data interchange based on 9-track reel-to-reel
technology. In each of these areas, many of the Company's competitors have
substantially greater financial and other resources, larger research and
development staffs, and more experience and capabilities in manufacturing,
marketing and distributing products than the Company. For network data
storage, the LibraryXpress products currently compete with products made by
Advanced Digital Information Corporation ("ADIC"), ATL Products, Inc.
("ATL"), Breece Hill Technologies, Inc. ("Breece Hill"), Hewlett-Packard
Company ("Hewlett-Packard"), Quantum and Storage Technology Corporation
("Storage Technology"), and the Company believes that additional competitors
can be expected to enter the market. For the data backup and interchange
market, which is based on IBM compatible 3480/3490 technology, the Company
offers a product line of 18 and 36-track products, which the Company believes
compete primarily with products made by Fujitsu Computer Products of America,
Inc. ("Fujitsu"), Hitachi Data Systems Corporation ("Hitachi"), Laser
Magnetic Storage and Storage Technology. For the 9-track data interchange
market, the Company believes it competes with Anritsu American Incorporated,
Hewlett-Packard and M4 Data, Inc.
RESEARCH AND DEVELOPMENT
The Company currently employs 36 people in its its research and development
("R&D") department, including 22 engineers who have extensive experience in the
tape industry. Many of these engineers are former employees of tape drive
companies such as Cipher Data Products, Archive Corporation and Conner
Peripherals, Inc., and have developed significant expertise in electrical,
mechanical and firmware design. Martin D. Gray, the Company's co-founder,
formerly served as Manager of R&D at Cipher, has 25 years of experience in the
tape industry, is the inventor of several tape patents and leads the Company's
R&D efforts to develop new technologies.
The Company's R&D department is capable of developing both tape drives and
robotic mechanisms, including the development of various aspects of data
channels, data compression, intelligent interfaces and firmware (embedded
systems software). This includes the ability to develop and test a tape path,
which is the core of any tape technology. Overland believes that these
capabilities provide it with a better understanding of tape technologies in
general and enable the Company to provide higher value-added content by
designing reliable products that better utilize the advantages of specific
technologies.
The Company's current R&D efforts are focused on the commercialization of a
new tape coding technique which it has developed and which utilizes the concept
of "partial response maximum likelihood." The Company believes that this
technique has the potential of significantly expanding the capacity and
throughput of any linear tape technology. The Company has been awarded one
patent and has other patents pending which relate to various aspects of this
technique. No prototypes currently exist which embody the new technique, and
there can be no assurance that the Company will succeed in its efforts to
develop such a product or commence shipment within its expected time frame or at
all. In addition, the Company is working on the development of automated tape
libraries using other tape technologies and is working on enhancements to
certain of its 36-track products to increase their speed and performance. The
Company's R&D expenditures amounted to $4.1 million, $3.7 million and $3.1
million in fiscal years 1997, 1996 and 1995, respectively, representing 7.0%,
7.8% and 8.1% of net sales, respectively. The Company's intends to spend 7.0%
to 8.0% of net sales on a sustained basis. Despite its R&D focus, there can be
no assurance that the Company will be able to identify, develop, manufacture,
market or support new or enhanced products successfully or on a timely basis or
that new products will gain market acceptance.
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MANUFACTURING
The Company has a fully integrated factory in San Diego, California with
three separate production lines. Its newest line, set up in January 1996, was
established for the production of the LibraryXpress products. A second line is
used for the production of both 18-track and 36-track products and a third line
is used for 9-track products. All of the Company's production lines and
manufacturing processes have been certified by major OEM customers. Overland
performs product assembly, integration and testing, while leaving component and
piece-part manufacturing to its supplier partners. The Company works closely
with a group of regional, national and international suppliers, which are
carefully selected based on their ability to provide quality parts and
components that meet the Company's specifications and present and future volume
requirements. A number of the Company's parts and components are not available
off the shelf, and are specifically designed by the Company for integration into
its products. The number of suppliers is kept to a minimum to utilize their
specific capabilities across several product lines. Management of this supply
chain is critical, because the average material content of the Company's
products represents approximately 80% of cost of goods sold.
In general, products are built to an intermediate stage or standard module
and are customized at the end of the manufacturing process to meet specific
customer needs or variations in product profiles. The Company believes that this
capability represents an effective way for the Company to minimize its inventory
levels while maintaining the ability to fill specific customer orders in short
lead times. Inventory planning and management are coordinated closely with
suppliers and customers to match the Company's production to market demand.
Product orders are confirmed and, in most cases, shipped to the customer within
one week. The Company fills orders as they are received and therefore believes
that its backlog levels are not indicative of future sales.
In its current facility, the Company has the capacity to support unit
output several times greater than its current run rate. All of its manufacturing
lines are capable of producing, on a single shift, double the capacity of the
current fiscal year forecast. The Company carefully controls and adjusts the
staffing of this capacity to meet the requirements at any specific time. Further
capacity increases could be achieved by adding multiple shifts or moving to a
full-time factory.
PROPRIETARY RIGHTS
The Company believes that, because of the rapid pace of technological
change in the tape storage industry, patent, copyright, trademark and trade
secret protection are less significant than factors such as the knowledge,
ability and experience of the Company's personnel, new product introductions and
product enhancements. Notwithstanding the foregoing, the Company relies on a
combination of patent, copyright, trademark and trade secret protection, non-
disclosure agreements and licensing arrangements to establish and protect its
proprietary rights. Such rights, however, may not preclude competitors from
developing substantially equivalent or superior products to those of the
Company. In addition, there can be no assurance that any patents held by, or
that may be issued to, the Company will not be challenged, invalidated or
circumvented, or that any rights granted thereunder would provide proprietary
protection to the Company.
The Company has entered into a five-year cross-license agreement with IBM,
effective January 1, 1996. Pursuant to the terms of the agreement, the Company
may use any of the patents owned by IBM within certain designated areas of
technology and IBM may use any of the patents of the Company that were in
existence at the effective date of the agreement or which are issued during the
term of the agreement. In consideration for this agreement, the Company is
required to pay royalty fees to IBM in an amount equal to 2.7% of world-wide
revenues generated from the Company's 18 and 36-track product sales, exclusive
of those sold to IBM.
EMPLOYEES
The Company had 208 employees (full-time equivalents) as of June 30, 1997,
including 49 in sales and marketing, 36 in research and development, 91 in
manufacturing and operations and 32 in finance, information systems, human
resources and other management. There are no collective bargaining contracts
covering any of the Company's employees and management believes that its
relationship with its employees is good.
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RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. THIS
REPORT CONTAINS FORWARD-LOOKING STATEMENTS, THE ACCURACY OF WHICH IS SUBJECT TO
MANY RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE
FOLLOWING RISK FACTORS, WHICH SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE
COMPANY AND ITS BUSINESS.
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCT DEVELOPMENT
The market for the Company's products is generally characterized by rapid
technological change and evolving industry standards and is highly competitive
with respect to timely innovation. The future success of the Company will
depend on its ability to anticipate changes in technology, to develop new and
enhanced products on a timely and cost-effective basis and to introduce,
manufacture and achieve market acceptance of such new and enhanced products. In
particular, the Company's future success is dependent on its LibraryXpress
product line. As a whole, the product line is relatively new and certain of the
recently announced modules have not yet achieved widespread market acceptance.
LibraryXpress is facing increasing competition both from competitive automated
tape library products, and can be expected to face competition from other
storage devices that may be developed in the future. The DLT tape drives used
by the Company in its LibraryXpress products are obtained from a sole supplier,
Quantum Corporation ("Quantum"). From time to time, Quantum customers such as
the Company (and its competitors) have been unable to obtain as many DLT tape
drives as needed due to drive shortages or quality issues. See "Dependence on
Certain Suppliers." Development schedules for high technology products are
inherently subject to uncertainty and there can be no assurance that the Company
will be able to meet its product development schedules, including those for
products based on its new partial response tape coding technique, or that
development costs will be within budgeted amounts. If the products or product
enhancements that the Company develops are not deliverable due to developmental
problems, quality issues or component shortage problems or if such products or
product enhancements do not achieve market acceptance or are unreliable, the
Company's business, financial condition and results of operations may be
materially and adversely affected. The introduction (whether by the Company or
its competitors) of new products embodying new technology such as new sequential
or random access mass storage devices and the emergence of new industry
standards can render existing products obsolete or not marketable.
COMPETITION AND PRICE PRESSURE
The worldwide tape storage market is intensely competitive as a large
number of manufacturers of alternative tape technologies compete for a limited
number of customers and barriers to entry are relatively low in the library
category. The Company currently participates in three market areas which are
defined by different tape technologies: (i) network data storage; (ii) data
backup and interchange based on IBM compatible 3480/3490 technology; and (iii)
data interchange based on 9-track reel-to-reel technology. In each of these
areas, many of the Company's competitors have substantially greater financial
and other resources, larger research and development staffs, and more experience
and capabilities in manufacturing, marketing and distributing products than the
Company. For network data storage, the LibraryXpress products currently compete
with products made by ADIC, ATL, Breece Hill, Hewlett-Packard, Quantum and
Storage Technology, and the Company believes that additional competitors can be
expected to enter the market. For the data backup and interchange market, which
is based on IBM compatible 3480/3490 technology, the Company offers a product
line of 18 and 36-track products, which the Company believes compete primarily
with products made by Fujitsu, Hitachi, Laser Magnetic Storage and Storage
Technology. For the 9-track data interchange market, the Company believes it
competes with Anritsu American Incorporated, Hewlett-Packard and M4 Data, Inc.
Except for the 9-track data interchange market, the markets for the Company's
products are characterized by significant price competition, and the Company
anticipates that its products will face increasing price pressure. This
pressure could result in significant price erosion, reduced profit margins and
loss of market share, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
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DEPENDENCE ON CERTAIN SUPPLIERS
The Company's products have a large number of components and
subassemblies produced by outside suppliers and it is highly dependent on
such suppliers for components and subassemblies, including DLT tape drives,
read-write heads, printed circuit boards and integrated circuits, which are
essential to the manufacture of the Company's products. In addition, for
certain of these items, the Company qualifies only a single source, which can
magnify the risk of shortages and decrease the Company's ability to negotiate
with its suppliers on the basis of price. If such shortages occur, or if the
Company experiences quality problems with suppliers, shipments of products
could be significantly delayed or costs significantly increased, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. Specifically, the Company's new LibraryXpress
automated tape libraries incorporate DLT tape drives manufactured by Quantum,
which is also a competitor of the Company in that Quantum markets its own
tape drives and tape loader products. Currently, there are no alternative
sources for the DLT tape drives supplied by Quantum. The Company does not
have a long-term contract with Quantum, which could cease supplying DLT tape
drives directly to the Company. From time to time in the past, the Company
has not been able to obtain as many drives as it has needed from Quantum due
to drive shortages or quality issues. Any prolonged inability to obtain
adequate deliveries could require the Company to pay more for components,
parts and other supplies, seek alternative sources of supply, delay shipment
of products and damage relationships with current and prospective customers.
Any such delay or damage could have a material adverse effect on the
Company's business, financial condition and results of operations. During
fiscal 1997 and in the first quarter of fiscal 1998, the Company has
experienced problems with the supply of DLT drives and such problems have
adversely affected the Company's sales and earnings during this period.
While the Company believes that the problems relating to the supply of DLT
drives are being solved by Quantum, no assurance can be given that such
problems will be resolved, that they will not re-occur, or that the Company
will not experience similar or more serious disruptions in supply in the
future.
FLUCTUATION IN RESULTS
The Company's results can fluctuate substantially from time to time for
various reasons. All of the markets served by the Company are volatile and
subject to market shifts, which may or may not be discernible in advance by the
Company. A slowdown in the demand for workstations, mid-range computer systems
and networks could have a significant adverse effect on the demand for the
Company's products in any given period. The Company has experienced delays in
receipt of purchase orders and, on occasion, anticipated purchase orders have
been rescheduled or have not materialized due to changes in customer
requirements. The Company's customers may cancel or delay purchase orders for a
variety of reasons, including the rescheduling of new product introductions,
changes in their inventory practices or forecasted demand, general economic
conditions affecting the computer market, changes in pricing by the Company and
its competitors, new product announcements by the Company or others, quality or
reliability problems related to the Company's products, or selection of
competitive products as alternate sources of supply. In addition, because a
large portion of the Company's sales are generated by its European channel, the
first fiscal quarter (July through September) has been impacted by seasonally
slow European orders, reflecting the summer holiday period in Europe. The
Company's operations may reflect substantial fluctuations from period to period
as a consequence of such industry shifts, price erosion, general economic
conditions affecting the timing of orders from customers, the supply of DLT
drives, as well as other factors discussed herein. In particular, the Company's
ability to forecast sales to distributors and VARs, and increasingly to OEMs, is
especially limited as such customers typically provide the Company with
relatively short order lead times or are permitted to change orders on short
notice. A portion of the Company's expenses are fixed and difficult to reduce
should revenues not meet the Company's expectations, thus magnifying the
material adverse effect of any revenue shortfall. The Company's gross profit
has fluctuated and will continue to fluctuate quarterly and annually based upon
a variety of factors such as the level of utilization of the Company's
production capacity, changes in product mix, average selling prices,
manufacturing yields, increases in production and engineering costs associated
with initial production of new programs, changes in the cost of or limitations
on availability of materials and labor shortages. Generally, new products have
higher gross margins than more mature products. Therefore, the Company's ability
to introduce new products in a timely fashion is an important factor to its
profitability. Based upon all of the foregoing, the Company believes that
period-to-period comparisons of its revenues and operating results will continue
to
8
<PAGE>
fluctuate and are not necessarily meaningful and should not be relied on as
indications of future performance. Furthermore, in some future quarter the
Company's revenues and operating results could be below the expectations of
public market analysts or investors, which could result in a material adverse
effect on the price of the Common Stock.
REPLACEMENT OF INFORMATION SYSTEMS
In July 1996, the Company began a project to replace its enterprise-wide
information and business systems by the end of fiscal year 1997 to more
effectively address the complexities of the Company's business and to support
its growth in the next five years. The project has been delayed by one
quarter and there can be no assurance that future delays in the
implementation process will not occur. The failure to successfully
accomplish the replacement of these systems in a timely manner, or any
failure otherwise to achieve the necessary levels of information and business
system support, could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS RELATED TO FOREIGN SOURCING AND FOREIGN SALES
Because a number of the Company's key components are currently manufactured
in Singapore and Malaysia, its results of operations can be affected by
fluctuations in currency exchange rates. The Company's international
procurement is also subject to certain other risks common to foreign operations
in general, including government regulation and import restrictions. During
fiscal year 1997, approximately 10% of the Company's cost of goods sold
consisted of materials purchased from suppliers in Singapore and Malaysia. An
adverse foreign exchange movement of the U.S. dollar versus the Singapore dollar
or other currency, or the imposition of import restrictions or tariffs by the
U.S. government on products or components shipped from Singapore, Malaysia or
another country could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, because of the
Company's use of components produced overseas, the sale of the Company's
products to domestic federal or state agencies may be restricted by limitations
imposed by the Buy American Act or the Trade Agreement Act.
Direct international sales accounted for 24% of sales in fiscal year 1997,
and the Company expects that international sales will continue to grow and
represent an even greater proportion of the Company's revenues in the future.
Sales to customers outside the U.S. are subject to various risks, including the
imposition of governmental controls, the need to comply with a wide variety of
foreign and U.S. export laws, political and economic instability, trade
restrictions, changes in tariffs and taxes, longer payment cycles typically
associated with international sales, as well as the greater difficulty of
administering business overseas. Furthermore, although the Company endeavors to
meet standards established by foreign regulatory bodies, there can be no
assurance that the Company will be able to comply with changes in foreign
standards in the future. The inability of the Company to design products that
comply with foreign standards could have a material adverse effect on the
Company.
In the second half of fiscal year 1997, the Company began assembling and
shipping certain of its products from its Wokingham facility in the U.K.
Products shipped to European customers from the Wokingham facility are
denominated and invoiced in British Pounds Sterling, thereby creating foreign
currency risk as the positive cash flows being generated by the Wokingham
facility must be periodically repatriated. Subsequent to June 30, 1997, the
Company began hedging this risk by buying U.S. dollars forward in the futures
market. It is expected, however, that most European customers outside of the
U.K. will choose to be billed in U.S. dollars once the enterprise-wide
information and business system becomes operational and provides for the
capability of multi-currency billing. If this occurs, then the Company's
foreign currency exposure will be lessened.
9
<PAGE>
DEPENDENCE ON KEY EMPLOYEES
The Company's future success depends in large part on its ability to
retain certain key executives and other key personnel, many of whom have been
instrumental in developing new technologies and setting strategic plans. The
Company's growth will also depend in large part on its continuing ability to
hire, motivate and retain highly qualified management, technical, sales and
marketing team members. Competition for such personnel is intense and there
can be no assurance that the Company will be able to retain its existing
personnel or attract additional qualified personnel in the future.
TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company believes that, because of the rapid pace of technological
change in the tape storage industry, patent and trade secret protection are
less significant than factors such as the knowledge, ability and experience
of the Company's personnel, new product introductions and product
enhancements. Nonetheless, the Company's ability to compete effectively
depends in part on its ability to develop and maintain proprietary aspects of
its technology. There can be no assurance that any future patents will be
granted or that any patents will be valid or provide meaningful protection
for the Company's product innovations. In addition, the laws of certain
foreign countries may not protect the Company's intellectual property to the
same extent as U.S. laws. Furthermore, there can be no assurance that
competitors will not independently develop similar products, duplicate the
Company's products or, if patents are issued to the Company, design around
the patents issued to the Company. The Company also relies on a combination
of copyright, trademark, trade secret and other intellectual property laws to
protect its proprietary rights. Such rights, however, may not preclude
competitors from developing substantially equivalent or superior products to
those of the Company's. In addition, many aspects of the Company's products
are not subject to significant intellectual property protection. While the
Company is not currently engaged in any intellectual property litigation or
proceedings, there can be no assurance that it will not become so involved in
the future or that its products do not infringe any intellectual property or
other proprietary right of any third party. An adverse outcome in litigation
or similar proceedings could subject the Company to significant liabilities
to third parties, require disputed rights to be licensed from others or
require the Company to cease marketing or using certain products, any of
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company may in the future pursue acquisitions of complementary
businesses, products or technologies as it seeks to expand and increase the
value-added component of its product offerings. Acquisitions involve
numerous risks, including difficulties in the assimilation of the operations
and personnel of the acquired business, the diversion of management's
attention from other business concerns, risks of entering markets in which
the Company has no direct prior experience, and the potential loss of key
employees of the acquired business. In addition, future acquisitions by the
Company may result in potentially dilutive issuances of equity securities and
the incurrence of additional debt and amortization expenses related to
goodwill and other intangible assets which could adversely affect the
Company's business, financial condition and results of operations.
WARRANTY EXPOSURE
The Company generally provides a two-year, return-to-factory warranty on
its products. For certain products, it provides or offers for sale a
two-year on-site warranty which is supplied by a third party service
provider. The Company pays the negotiated price of the contract to the
service provider in advance and the service provider is then responsible for
the costs of providing warranty service during the term of the contract. For
products which the Company distributes and for tape drives used in the
Company's products but manufactured by a third party, the Company passes on
to the customer the related manufacturer's warranty. Although the Company
has established reserves for the estimated liability associated with product
warranties, there can be no assurance that such reserves will be adequate or
that the Company will not incur substantial warranty expenses in the future
with respect to new or established products.
10
<PAGE>
ITEM 2. PROPERTIES
The Company leases all facilities used in its business. Its
headquarters are located in San Diego, California in a 3-building light
industrial complex comprising approximately 121,000 square feet. The lease
expires in August 2002. The San Diego facility houses all of the Company's
research and development and administrative functions as well as a major
portion of manufacturing, sales, sales administration, marketing and customer
support. The Company also leases a small facility located in Wokingham,
England which houses some light manufacturing, sales, sales administration
and customer support for the European marketplace. Two other small
facilities are leased in Longmont, Colorado and in Nashua, New Hampshire for
the development of R&D prototypes and an OEM sales office, respectively. The
Company believes that its facilities are suitable for their uses and are, in
general, adequate for the Company's current and identified future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company, its directors and certain of its officers have been named
as defendants in two putative class action lawsuits filed on April 21, 1997
and May 2, 1997 in the U.S. District Court for the Southern District of
California. In both cases, the plaintiffs purport to represent a class of all
persons who purchased the Company's Common Stock between February 21, 1997
and March 14, 1997. The complaints allege that the defendants violated
various federal securities laws through material misrepresentation and
omissions in connection with the Company's initial public offering and its
registration statement on Form S-1 which was declared effective by the
Securities and Exchange Commission on February 21, 1997. The suits seek
rescission of their share purchases or rescissory damages if their shares
have been sold, as well as attorneys' fees and other costs and expenses.
On September 16, 1997, the Court entered an Order permitting the
voluntary dismissal of the first-filed lawsuit without prejudice. The
plaintiff in the second lawsuit now has been appointed as the Lead Plaintiff
in this litigation, but the defendants have not yet been required to answer
the allegations in the complaint. No discovery has been conducted, and the
outcome of the remaining lawsuit cannot be determined. However, management
believes that it has meritorious defenses and intends to defend against the
remaining lawsuit vigorously. The Company maintains directors' and officers'
liability insurance to provide coverage against suits of this nature, and
other than legal fees incurred to date, no amounts have been recorded in the
financial statements for any losses which may result from this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
[caad 214]PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National
Market under the symbol "OVRL" on February 21, 1997, the effective date of
its initial public offering. As of September 15, 1997, there were
approximately 100 shareholders of record. The Company has not paid any
dividends on its Common Stock and does not anticipate paying any dividends in
the foreseeable future. The high and low closing prices of Overland Data
Common Stock from February 21, 1997 through June 30, 1997 were as follows:
PRICE RANGE OF COMMON STOCK
High Low
Fiscal 1997:
Third quarter $13.00 $4.75
Fourth quarter 7.00 4.75
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
consolidated financial statements of the Company and the notes thereto. This
information should be read in conjunction with Item 7 of this Report -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and with the consolidated financial statements of the Company and
the related notes thereto set forth at the pages indicated in Item 14(a)(1).
Ten
months Year
At or for Years Ended June 30, ended ended
---------------------------------- June 30, August 31,
1997 1996 1995 1994 1993(3) 1992
------- ------- ------- ------- -------- ----------
(in thousands except per share data)
SUMMARY OF OPERATIONS
Net sales $59,146 $47,226 $38,156 $34,044 $11,892 $9,855
Gross profit 20,371 16,081 11,115 11,154 4,848 4,320
Income (loss) from
operations 4,736 3,541 980 587 (456) (664)
Income (loss) before
income taxes 4,987 3,413 770 356 (412) (546)
Net income (loss)(1) 3,100 3,159 501 137 (484) (486)
Net income (loss) per
share(2) .34 .40 .07 .02 (.09) (.10)
BALANCE SHEET DATA
Cash and cash
equivalents $18,926 $ 19 $ 101 $ 1,332 $ 79
Working capital 36,733 10,307 6,430 5,097 4,063
Total assets 48,260 19,771 14,453 14,329 8,950
Long-term debt,
net of current
portion -- 1,500 1,400 747 1,255
Convertible redeemable
preferred stock -- 5,200 5,567 5,879 4,315
Shareholders' equity 40,317 5,858 1,767 900 682
- ----------------------
(1) The Company's effective tax rate for the year ended June 30, 1996 was
affected in the fourth quarter of the year by a one-time tax valuation allowance
adjustment, which reduced income tax expense and correspondingly increased net
income by $997,000, or $.13 per share. Without this adjustment, for the year
ended June 30, 1996 net income and net income per share would have been
$2,162,000 and $.28, respectively.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net income (loss) per share.
(3) In 1993, the Board of Directors approved a change in the Company's fiscal
year to June 30 from August 31. Consequently, the consolidated financial
statements for the period ended June 30, 1993 reflect ten months of actual
results.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS REPORT CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE PERFORMANCE OF THE COMPANY. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS,
PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS IDENTIFIED IN
THIS REPORT, INCLUDING THE MATTERS SET FORTH BELOW UNDER THE CAPTION "RISK
FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
GENERAL
Overland Data designs, develops, manufactures, markets and supports
magnetic tape data storage systems used by businesses for backup, archival
and data interchange functions. The Company's primary products are currently
based on three different half-inch magnetic tape technologies: (i) DLT, (ii) 18
& 36-track and (iii) 9-track. In March 1996, the Company introduced the
LibraryXpress, a scaleable automated tape library system incorporating DLT
tape drives, and began shipping the LXB base module. In the second half of
fiscal 1997, the Company introduced two additional modules: the LXG global
control unit and the LXC capacity module. In May 1997, the LXS MiniLibrary, a
single-drive, non-scalable version of the LibraryXpress, was introduced to
serve the lower end of the network market. The Company's second product
line, TapeXpress, consists of 18 and 36-track products based on the IBM
3480/3490/3490E technologies. Its third product line, TapePro, consists of
9-track reel-to-reel tape drives which are used exclusively for data
interchange. The Company also distributes a line of DLT products manufactured
by Quantum and markets other items supplied by third parties including
controller cards, interchange software, storage management software, spare
parts and tape media.
RESULTS OF OPERATIONS
The following tables set forth certain data as a percentage of net sales:
STATEMENT OF OPERATIONS:
Fiscal Years Ended June 30,
----------------------------
1997 1996 1995
------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 65.6 65.9 70.9
------- -------- --------
Gross profit 34.4 34.1 29.1
------- -------- --------
Operating expenses:
Sales and marketing 12.3 12.6 12.8
Research and development 7.0 7.8 8.1
General and administrative 7.1 6.2 5.7
------- -------- --------
Total Expenses 26.4 26.6 26.6
------- -------- --------
Income from operations 8.0 7.5 2.5
Interest and other, net .4 (.3) (.5)
------- -------- --------
Income before income taxes 8.4 7.2 2.0
Provision for income taxes 3.2 .5 .7
------- -------- --------
Net income 5.2% 6.7% 1.3%
------- -------- --------
------- -------- --------
13
<PAGE>
PRODUCT MIX TABLE:
Fiscal Years Ended June 30,
----------------------------
1997 1996 1995
------- -------- --------
Company products:
LibraryXpress 28.6% 2.6% .0%
36-track 28.1 19.6 6.1
18-track 9.7 15.3 20.3
9-track 18.2 29.4 48.0
Spare parts, controllers, other 8.4 10.3 7.0
Other parts:
DLT distributed products 6.9 21.5 17.8
Other distributed products .1 1.3 .8
------- -------- --------
Total 100.0% 100.0% 100.0%
------- -------- --------
------- -------- --------
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES. The Company's net sales of $59.1 million in fiscal year 1997
grew by $11.9 million or 25.2% over net sales of $47.2 million in fiscal year
1996. Sales growth in certain of the Company's products were partially offset
by declines in other product lines. The strongest growth over the prior year
was experienced in the LibraryXpress product line, which began shipping in March
1996. Sales of LibraryXpress in fiscal year 1997, the first full year of
shipments, amounted to $16.9 million compared to $1.2 million in 1996.
Although the majority of the growth was generated by sales of the LibraryXpress
LXB base module, additional sales were generated in the last half of the year
when the Company introduced three new products: the LXG global control unit, the
LXC capacity module and the LXS mini-library. Offsetting this growth, however,
was a $6.1 million decline in sales of DLT distributed product, due principally
to a replacement of sales of Quantum DLT loaders by sales of the Company's own
LibraryXpress products. Sales of the Company's 36-track products of $16.6
million in fiscal year 1997 grew by $7.3 million or 78.5% from $9.3 million in
1996. This growth resulted principally from increased sales to IBM of the L490E
model pursuant to a new supply agreement entered into in the second quarter of
fiscal year 1997. Sales of 18-track products of $5.7 million fell by $1.5
million or 20.8% from $7.2 million in the prior year. This decline was the
result of an upward migration by the Company's customers from 18-track products
to its 36-track products and to a general decline in the use of 18-track
products in favor of other technologies. Sales of 9-track products of
$10.9 million in fiscal year 1997 fell by $3.5 million or 24.3% from $14.4
million in 1996. This reflects the general maturity of the 9-track technology,
a trend which the Company expects to continue in the foreseeable future.
Additionally, during fiscal year 1997, the Company made end-of-life
announcements on certain of its 9-track products to narrow its 9-track product
offerings.
GROSS PROFIT. The Company's gross profit amounted to $20.4 million in
fiscal year 1997, up from $16.1 million in fiscal year 1996, which represented
gross margins of 34.4% and 34.1%, respectively. The gross margins were improved
by the shift from sales of DLT distributed product at lower margins, to sales of
LibraryXpress products at relatively higher margins. However, this was offset
by growth in sales to the Company's OEM customers, which are typically at
relatively lower margins than offered to its other customers.
SALES AND MARKETING EXPENSES. Sales and marketing expenses amounted to
$7.3 million or 12.3% of net sales in fiscal year 1997 compared to $5.9 million
or 12.6% of sales in 1996. This increase in total expenditures resulted from
costs needed to support the higher sales level, including salaries and benefits,
sales commissions, advertising and promotion and travel and related costs.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses amounted to $4.1 million
or 7.0% of net sales in fiscal year 1997 compared to $3.7 million or 7.8% of net
sales in 1996. The R&D efforts during 1997 and the
14
<PAGE>
increased expenses compared to 1996 related to the development of the LXG,
LXC and LXS products within the LibraryXpress product family. The Company
also incurred expenses in both years related to the development of its new
tape recording technology and coding scheme using the concept of partial
response maximum likelihood.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
amounted to $4.2 million or 7.1% of net sales in fiscal year 1997 compared to
$2.9 million or 6.2% of net sales in 1996. The higher level of expenses in 1997
included an increase in support personnel, computer related expenses, legal fees
related to the class action lawsuits filed against the Company and to patent
work related to the Company's new tape coding technique, increased bad debt
reserves related to the higher level of sales and increased facility costs.
INTEREST INCOME/EXPENSE. In fiscal year 1997, the Company generated net
interest income of $223,000, compared to fiscal year 1996 when net interest
expense amounted to $154,000. The net interest income in 1997 resulted from
earnings on investment of funds generated by the Company's initial public
offering and elimination of interest expense after repayment of bank
borrowings. The interest expense in 1996 included $124,000 related to
borrowings under the Company's revolving bank line of credit and $30,000 of
interest expense related to an installment note which was repaid in full in
November 1995. Average borrowings under the Company's bank line of credit in
fiscal year 1996 amounted to $1.4 million.
INCOME TAXES. The Company's fiscal year 1997 provision for state and
federal income taxes amounted to $1.9 million or an effective tax rate of
37.8%, which the Company believes to be representative of its normalized
effective tax rate. In fiscal year 1996, the tax provision amounted to
$254,000, resulting in an abnormally low effective tax rate of 7.4%. The low
tax rate in 1996 was the result of the release of a deferred tax valuation
allowance of $997,000 in the fourth fiscal quarter which is discussed below
and in Note 5 to the Consolidated Financial Statements.
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. The Company's net sales of $47.2 million in fiscal year 1996
grew by $9.0 million or 23.6% over net sales of $38.2 million in fiscal year
1995. This sales growth was driven by new product introductions which more
than offset declines in both 18-track and 9-track sales. In particular, the
first shipments of the LXB, the base unit product in the Company's new
LibraryXpress product line, were made in March 1996. Shipments of the LXB
during the last four months of fiscal year 1996 generated $1.2 million in
sales. An additional $3.4 million in fiscal year 1996 growth was generated
from a 50.0% increase in sales of DLT distributed products, including the DLT
4500/4700 loaders which were introduced during the year by Quantum. The
largest portion of sales growth, $7.0 million, was reported in the Company's
36-track products, with fiscal year 1996 sales of $9.3 million growing to
four times its fiscal year 1995 level of $2.3 million. This growth was the
result of (i) strong sales of the inaugural 36-track product, the L490E,
which was introduced midway through fiscal year 1995, and (ii) two new
36-track product introductions, the 60-cartridge L60E, which began shipping
in November 1995, and the single cartridge T490E, which began shipping in
March 1996. In the 18-track product line, sales declined by 6.8% in fiscal
year 1996, reflecting the market's general migration to 36-track products.
Sales of 9-track products of $14.4 million in fiscal year 1996 declined by
$4.2 million or 22.6% from $18.6 million in fiscal year 1995, reflecting the
general maturity of the 9-track technology. Finally, fiscal year 1996 sales
of controllers, spare parts, software and other products amounted to $4.9
million, an increase of 81.5% over the fiscal year 1995 level of $2.7
million. This growth was attributable to increased sales of spare parts and
tape media, mainly DLT tape.
GROSS PROFIT. The Company's gross profit amounted to $16.1 million in
fiscal year 1996, up from $11.1 million in fiscal year 1995, which
represented gross margins of 34.1% and 29.1%, respectively. The increased
profitability resulted from higher margins on newly introduced products, and
improved margins on DLT distributed product because more product was sold
through the VAR and European channels compared to a concentration in the
distributor channel in the prior year. In addition, gross margins in fiscal
year 1996 were significantly improved on 18-track products as material cost
savings were realized from an investment in re-engineering certain electrical
components.
15
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses amounted to
$5.9 million or 12.6% of net sales in fiscal year 1996 compared to $4.9
million or 12.8% of sales in 1995. This increase in total expenditures
resulted from costs needed to support the higher sales level, including
salaries and benefits, sales commissions, advertising and promotion and
travel and related costs. In addition, higher costs were incurred for
prototype units, advertising and promotions related to new product
introductions.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses amounted to $3.7
million or 7.8% of net sales in fiscal year 1996 compared to $3.1 million or
8.1% of net sales in 1995. The increased expenses related to the development
of the Company's two new 36-track products, the T490E and the L60E, and to a
greater extent, the development of the new LibraryXpress products. The
development of the two 36-track products required a lower level of expense
than the LibraryXpress products because they were derivative products using
common electrical components and robotics. The Company also incurred expenses
in fiscal year 1996 related to the development of a new tape recording
technology and coding scheme using the partial response maximum likelihood
concept.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses amounted to $2.9 million or 6.2% of net sales in fiscal year 1996
compared to $2.2 million or 5.7% of net sales in 1995. The higher level of
expenses in 1996 included legal fees related to the filing of a number of
patent applications, increased bad debt reserves related to the higher level
of sales and increased facility costs and computer related expenses.
INTEREST EXPENSE. Net interest expense amounted to $154,000 in fiscal
year 1996 and included $124,000 of interest expense related to borrowings
under the Company's revolving bank line of credit and $30,000 of interest
expense related to the final installment of a note which was repaid in full
in November 1995. Average borrowings under the Company's bank line of credit
in fiscal year 1996 amounted to $1.4 million. In fiscal year 1995, net
interest expense amounted to $204,000 consisting of $214,000 of interest
expense and $10,000 of interest income. The portion of the interest expense
relating to the installment note amounted to $145,000 and the remaining
$69,000 of interest expense related to borrowings under the Company's
revolving bank line of credit, which borrowings averaged $725,000 in fiscal
year 1995.
INCOME TAXES. The Company's fiscal year 1996 provision for state and
federal income taxes amounted to $254,000 or an effective tax rate of 7.4%.
In fiscal year 1995, the tax provision amounted to $269,000 resulting in a
more normalized effective tax rate of 35%. The low tax rate in 1996 was the
result of the release of a deferred tax valuation allowance of $997,000 in
the fourth fiscal quarter. As discussed in Note 5 to the Consolidated
Financial Statements, in prior years the Company established the reserve in
accordance with SFAS No. 109, "Accounting for Income Taxes," which requires
that a valuation allowance be recorded "when it is more likely than not" that
any portion of a deferred tax asset will not be realized. The reserve had
been established to reduce the net deferred tax asset to a minimal amount,
because of the Company's past history of operating losses and marginal
profitability and due to the inherent uncertainty in forecasts of future
events and operating results. However, in the fourth quarter of fiscal year
1996, due to the significant profitability in that quarter and based on
management's expectations of future results, the Company determined that it
was more likely than not that deferred tax assets would be realized through
future taxable earnings or alternative tax strategies. As a result, the
valuation allowance was reduced to zero in that quarter.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1997, the Company used $3.4 million to fund its
operating activities, primarily to build receivables and inventories in
support of the higher sales levels. An additional $2.3 million was invested
in capital expenditures, primarily for the Company's new enterprise wide
computer system, leasehold improvements and tooling. The Company raised
$25.8 million in February 1997 in its initial public offering, of which $1.5
million was used to repay outstanding bank indebtedness.
At June 30, 1997, the Company had $18.9 million of cash and cash
equivalents, $36.7 million of net working capital, an unused bank line of
credit of $5 million and no other funded debt. The Company believes that
these resources will be sufficient to fund its operations and to provide for
its growth for the foreseeable future.
16
<PAGE>
INFLATION
Inflation has not had a significant negative impact on the Company's
operations during the periods presented. With the exception of its OEM
contracts, which contain fixed pricing for up to one year, the Company has
historically been able to pass on to its customers increases in raw material
prices caused by inflation. There can be no assurance, however, that the
Company will be able to continue to pass on any future increases should they
occur. Although the Company's exposure to the effects of inflation will be
magnified by the expected increase in OEM business, the Company believes that
its continuous efforts at material and labor cost reductions will minimize
such effects.
SELECTED QUARTERLY FINANCIAL DATA
The following table presents selected quarterly financial information
for the periods indicated. This information has been derived from unaudited
consolidated financial statements which, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information. These operating
results are not necessarily indicative of results for any future period.
<TABLE>
Quarters Ended
---------------------------------------------------------------------------
Fiscal Year 1996 Fiscal Year 1997
------------------------------------- ------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
1995 1995 1996 1996 1996 1996 1997 1997
-------- ------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $11,023 $12,296 $10,889 $13,018 $12,013 $15,220 $15,404 $16,509
Gross Profit 3,925 4,015 3,635 4,506 4,440 5,372 5,237 5,322
Income from operations 759 1,004 493 1,285 593 1,817 1,317 1,009
Income before income taxes 744 982 449 1,238 541 1,740 1,329 1,377
Net income 472 640 284 1,763 324 1,044 797 935
Net income per share .06 .08 .04 .22 .04 .13 .09 .08
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is included under the captions
entitled "Election of Directors" and "Information Concerning Directors and
Executive Officers" in the Company's Proxy Statement and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
entitled "Executive Compensation" in the Company's Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN TRANSACTIONS
The information required by this item is included under the caption
entitled "Certain Relationships and Transactions" in the Company's Proxy
Statement and is incorporated herein by reference.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. The following Consolidated Financial
Statements of Overland Data, Inc. and Report of Independent Accountants are
included in a separate section of this Report at the page numbers so indicated:
Consolidated Balance Sheet as of June 30, 1997 and 1996.. F-1
Consolidated Statement of Operations for the Years
Ended June 30, 1997, 1996 and 1995.................... F-2
Consolidated Statement of Shareholders' Equity for the
Years Ended June 30, 1997, 1996 and 1995.............. F-3
Consolidated Statement of Cash Flows for the Years Ended
June 30, 1997, 1996 and 1995.......................... F-4
Notes to Consolidated Financial Statements............... F-5 to F-13
Report of Independent Accountants........................ F-14
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedule of Overland Data, Inc. for the years ended June 30, 1997, 1996 and 1995
is filed as part of this Report on the page number so indicated and should be
read in conjunction with the Consolidated Financial Statements of Overland Data,
Inc.:
Schedule II - Valuation and Qualifying Accounts.......... S-1
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
(a)(3) EXHIBITS.
3.1 Registrant's Amended and Restated Articles of Incorporation.*
3.2 By-Laws.*
4.1 Specimen stock certificate.*
4.2 Investors' Rights Agreement, dated May 21, 1993, between the Registrant
and the parties named therein.*
10.1 Basic Order Agreement #16529, dated July 1, 1993 and as amended through
November 10, 1995, between the Registrant and Digital Equipment
Corporation.*
10.2 Production Procurement Agreement #RMSS-ODI-96-01-0, dated October 25,
1996, between the Registrant and International Business Machines
Corporation.*
10.3 Credit Agreement effective as of June 27, 1997 between the Registrant and
Imperial Bank.
10.4 Standard Industrial Lease--Multi-Tenant, dated May 26, 1993, between the
Registrant and Mitsui/SBD America Fund 87-1.*
10.5 First Amendment to the 1995 Stock Option Plan dated January 21, 1997. *
10.6 1996 Employee Stock Purchase Plan adopted December 12, 1996.*
11.1 Statement Re: Computation of Earnings Per Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
24.1 Power of Attorney (included on Signature Page).
27.1 Financial Data Schedule (for EDGAR use only).
- ---------------------
* Incorporated by reference to the Company's Registration Statement
No. 333-18583 dated February 21, 1997.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the
Company during the fourth quarter of the year ended June 30, 1997.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
OVERLAND DATA, INC.
By: /s/ SCOTT McCLENDON
-----------------------------------
Scott McClendon
President & Chief Executive Officer
Dated: September 27, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Scott McClendon and Vernon A. LoForti, jointly
and severally, as his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Annual Report on Form 10-K and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact, or his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ SCOTT McCLENDON President, Chief Executive September 27, 1997
------------------- Officer and Director
Scott McClendon
/s/ MARTIN D. GRAY Vice President, Secretary and September 27, 1997
------------------- Director
Martin D. Gray
/s/ VERNON A. LOFORTI Vice President, Chief September 27, 1997
------------------- Financial Officer and
Vernon A. LoForti Assistant Secretary
/s/ WILLIAM W. OTTERSON Director September 27, 1997
-------------------
William W. Otterson
/s/ JOSEPH D. RIZZI Director September 27, 1997
-------------------
Joseph D. Rizzi
/s/ JOHN A. SHANE Director September 27, 1997
-------------------
John A. Shane
20
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------
1997 1996
-------------- -------------
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,926 $ 19
Accounts receivable, less allowance for doubtful accounts
and returns of $774 and $624, respectively 11,151 7,226
Inventories 12,101 8,425
Deferred income taxes 1,743 1,328
Other current assets 607 364
-------------- -------------
Total current assets 44,528 17,362
Property and equipment, net 3,499 2,128
Deferred income taxes 77 5
Intangible and other assets 156 276
-------------- -------------
$ 48,260 $ 19,771
-------------- -------------
-------------- -------------
LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,372 $ 4,433
Accrued liabilities 1,377 1,493
Accrued payroll and employee compensation 1,046 1,129
-------------- -------------
Total current liabilities 7,795 7,055
Long-term debt - 1,500
Other liabilities 148 158
-------------- -------------
Total liabilities 7,943 8,713
-------------- -------------
Convertible redeemable preferred stock, at liquidation value:
Series A preferred stock - 367
Series B preferred stock - 1,281
Series C preferred stock - 3,552
-------------- -------------
- 5,200
-------------- -------------
Commitments and contingencies (Note 9)
Shareholders' equity:
Common stock, no par value, 25,000,000 shares
authorized; 10,434,593 and 5,062,325 shares
issued and outstanding in 1997 and 1996, respectively 33,246 1,896
Cumulative translation adjustment 9 -
Retained earnings 7,062 3,962
-------------- -------------
Total shareholders' equity 40,317 5,858
-------------- -------------
$ 48,260 $ 19,771
-------------- -------------
-------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------
1997 1996 1995
---------- ---------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales $ 59,146 $ 47,226 $ 38,156
Cost of goods sold 38,775 31,145 27,041
---------- ---------- ---------
Gross profit 20,371 16,081 11,115
Operating expenses:
Sales and marketing 7,298 5,935 4,891
Research and development 4,125 3,697 3,076
General and administrative 4,212 2,908 2,168
---------- ---------- ---------
15,635 12,540 10,135
---------- ---------- ---------
Income from operations 4,736 3,541 980
Other income (expense):
Interest income 408 1 10
Interest expense (185) (155) (214)
Other income (expense), net 28 26 (6)
---------- ---------- ---------
Income before income taxes 4,987 3,413 770
Provision for income taxes 1,887 254 269
---------- ---------- ---------
Net income $ 3,100 $ 3,159 $ 501
---------- ---------- ---------
---------- ---------- ---------
Net income per share $ .34 $ .40 $ .07
---------- ---------- ---------
---------- ---------- ---------
Shares used in computing net income per share 9,222 7,857 7,412
---------- -------- ---------
---------- -------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
OVERLAND DATA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
------------ TRANSLATION RETAINED
SHARES AMOUNT ADJUSTMENT EARNINGS TOTAL
---------- ----------- ----------- ---------- -----------
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 3,903,661 $ 543 $ 302 $ 845
Preferred stock conversion 318,396 367 367
Exercise of stock options 39,040 30 30
Issuance of common stock 30,000 24 24
Net income 501 501
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1995 4,291,097 964 803 1,767
Preferred stock conversion 318,397 367 367
Exercise of stock options 280,481 220 220
Issuance of common stock 172,350 345 345
Net income 3,159 3,159
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1996 5,062,325 1,896 3,962 5,858
Preferred stock conversion 2,336,574 5,200 5,200
Exercise of stock options 168,630 142 142
Issuance of common stock in
initial public offering 2,836,364 25,659 25,659
Other issuances of common
stock 30,700 92 92
Foreign currency translation $ 9 9
Tax benefits from exercise of
stock options 257 257
Net income 3,100 3,100
---------- ---------- ---------- ---------- ----------
Balance at June 30, 1997 10,434,593 $ 33,246 $ 9 $ 7,062 $ 40,317
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
OVERLAND DATA,INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Net income $ 3,100 $ 3,159 $ 501
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Deferred tax benefit (487) (1,237) (66)
Depreciation and amortization 1,050 862 725
Loss on disposal of property and equipment 7 50 10
Non-cash compensation charge - - 8
Changes in assets and liabilities:
Accounts receivable (3,925) (926) (1,701)
Inventories (3,676) (3,069) 309
Other assets (243) (278) 77
Accounts payable and accrued liabilities 813 1,931 296
Accrued payroll and employee compensation (1) 349 28
-------- -------- --------
Net cash (used in) provided by operating activities (3,362) 841 187
-------- -------- --------
Investing activities:
Capital expenditures (2,308) (841) (670)
-------- -------- --------
Net cash used in investing activities (2,308) (841) (670)
-------- -------- --------
Financing activities:
Proceeds from issuance of common stock 25,751 345 16
Proceeds from exercise of stock options 60 220 30
Net (payments) proceeds under bank line of credit (1,500) 100 700
Principal payments on notes payable - (747) (1,494)
Tax benefits from exercise of stock options 257 - -
-------- -------- --------
Net cash provided by (used in) financing activities 24,568 (82) (748)
-------- -------- --------
Effect of exchange rate changes on cash 9 - -
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 18,907 (82) (1,231)
Cash and cash equivalents, beginning of period 19 101 1,332
-------- -------- --------
Cash and cash equivalents, end of period $18,926 $19 $101
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $2,314 $1,150 $411
-------- -------- --------
-------- -------- --------
Cash paid for interest $186 $155 $215
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL NON-CASH ACTIVITIES:
Non-cash common stock issuance $ - $- $8
-------- -------- --------
-------- -------- --------
Compensation recognized as equity
upon exercise of common stock options $82 $- $-
-------- -------- --------
-------- -------- --------
Conversion of Series A preferred stock to common stock $367 $367 $367
-------- -------- --------
-------- -------- --------
Conversion of Series B preferred stock to common stock $1,281 $- $-
-------- -------- --------
-------- -------- --------
Conversion of Series C preferred stock to common stock $3,552 $- $-
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Overland Data, Inc. (the "Company") was incorporated on September 8, 1980 under
the laws of the state of California. The Company designs, develops,
manufactures, markets and supports magnetic tape data storage systems used by
businesses for high performance network backup and archival solutions as well as
data interchange. The Company's fiscal year ends on the Sunday closest to June
30. For ease of presentation, the Company's year end is deemed to be June 30.
Fiscal years 1997, 1996 and 1995 each included 52 weeks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Overland Data (Europe) Ltd. and Overland Data
Export Limited, a foreign sales corporation. All significant intercompany
accounts and transactions have been eliminated.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Sales are recognized upon shipment of products to customers and are not subject
to any specific right of return or price protection, except for any defective
product which may be returned under the Company's warranty policy.
WARRANTY COSTS
The Company generally provides a two-year return-to-factory warranty on its
products. In addition, on-site warranties are provided for the Company's
line of DLT LibraryXpress products. The Company records a provision for
estimated future warranty costs at the time of shipment for both the
return-to-factory and on-site warranties. Separately priced on-site
warranties are offered for sale to customers of other product lines. The
Company contracts with outside vendors to provide service relating to all
on-site warranties. Warranty revenues and amounts paid in advance to outside
service organizations are recognized in the financial statements in sales and
cost of goods sold, respectively, over the warranty period.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
It is management's belief that the carrying amounts shown for the Company's
financial instruments are reasonable estimates of their related fair values
based on their terms or short-term nature.
EXPORT SALES
Export sales by the Company, principally in Europe, for the years ended June 30,
1997, 1996 and 1995 were $14,391,000, $12,775,000 and $7,737,000, respectively.
F-5
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CONCENTRATIONS OF CREDIT RISK
The Company's customers include original equipment manufacturers,
integrators, distributors, value added resellers and end users. Financial
instruments which potentially subject the Company to concentrations of credit
risk are primarily accounts receivable. The Company performs ongoing credit
evaluations of its customers, generally requires no collateral and maintains
allowances for potential credit losses and sales returns. The Company's
largest single customer accounted for approximately 14%, 23% and 21% of sales
in fiscal 1997, 1996 and 1995, respectively, and approximately 12% and 33% of
accounts receivable at June 30, 1997 and 1996, respectively. The second
largest customer accounted for 10% of sales in 1997 and 11% of accounts
receivable at June 30, 1997. No other customer accounted for 10% or more of
sales in any of the three years presented.
CASH EQUIVALENTS
Highly liquid investments with original maturities of three months or less are
classified as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first-in-first-out method) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the depreciable assets
(generally two to five years). Leasehold improvements are amortized on a
straight-line basis over the shorter of the useful life of the asset or the
lease term. Expenditures for normal maintenance and repair are charged to
expense as incurred, and improvements are capitalized. Upon the sale or
retirement of property or equipment, the asset cost and related accumulated
depreciation are removed from the respective accounts and any gain or loss is
included in the results of operations.
INTANGIBLE ASSETS
Intangible assets, resulting from the acquisition of assets relating to certain
product lines, are amortized using the straight-line method over five years (the
estimated life of the products). Accumulated amortization was $690,000 and
$570,000 in 1997 and 1996, respectively.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of an
asset's carrying value unlikely. An impairment loss would be recognized when
the sum of the expected future net cash flows is less than the carrying amount
of the asset. No such impairment losses have been recorded by the Company.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiary are translated into
U.S. dollars using period-end exchange rates for assets and liabilities and
weighted average exchange rates during the period for revenues and expenses.
Gains or losses from foreign currency transactions are recognized currently in
income. Such gains and losses were not significant in any year presented.
F-6
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
INCOME TAXES
The Company provides for income taxes utilizing the liability method. Under the
liability method, a deferred tax asset and/or liability is computed for both the
expected future impact of differences between the financial statement and tax
bases of assets and liabilities, and for the expected future tax benefit to be
derived from tax credits and loss carryforwards. A valuation allowance is
established to reflect the likelihood of realization of deferred tax assets.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense (Note 7).
NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
common shares and common stock equivalents, using the treasury stock method,
outstanding during the respective periods. All issuances of common stock and
all stock options granted within one year prior to the filing of the
Company's registration statement for its initial public offering and through
the effective date thereof have been included as outstanding for all periods
presented using the treasury stock method.
NEW ACCOUNTING PRONOUNCEMENT
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS
No. 128 will be adopted by the Company as required in the second quarter of
fiscal 1998. Upon adoption of SFAS No. 128, the Company will present basic
earnings per share as well as diluted earnings per share. Basic earnings per
share will be computed based on the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share will
be computed based on the weighted average number of shares of common stock
outstanding during the period increased by the effect of diluted stock
options using the treasury stock method. Pro forma basic earnings per share
for the years ended June 30, 1997, 1996 and 1995 are $.43, $.66 and $.12,
respectively. Pro forma diluted earnings per share for the years ended June
30, 1997, 1996 and 1995 are $.34, $.40 and $.07, respectively.
NOTE 2 - COMPLETION OF INITIAL PUBLIC OFFERING
On February 21, 1997, the Company completed its initial public offering of
3,450,000 shares of common stock (of which 2,836,364 shares were sold by the
Company and 613,636 shares were sold by certain shareholders) at a price to
the public of $10 per share. Net proceeds to the Company were $26,659,000
after payment of the underwriters' commissions and deduction of offering
expenses.
F-7
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
JUNE 30,
-------------------------
1997 1996
-------- --------
(IN THOUSANDS)
Inventories:
Raw materials $ 8,160 $ 5,167
Work in process 2,839 1,816
Finished goods 1,102 1,442
-------- --------
$ 12,101 $ 8,425
-------- --------
-------- --------
Property and equipment:
Machinery and equipment $ 3,171 $ 2,433
Computer equipment 2,288 1,141
Furniture and fixtures 210 165
Leasehold improvements 779 429
-------- --------
6,448 4,168
Less accumulated depreciation and amortization (2,949) (2,040)
-------- --------
$ 3,499 $ 2,128
-------- --------
-------- --------
Depreciation expense was $930,000, $724,000 and $574,000 in 1997, 1996 and 1995,
respectively.
NOTE 4 - LONG-TERM DEBT
The Company has a $5,000,000 unsecured revolving credit facility which expires
on November 5, 1999. Borrowings under the line may be in the form of working
capital loans, which bear interest at the bank's prime rate, or banker's
acceptances priced at the bank's BA rate plus 2.25%. The Company is required to
maintain certain covenants and financial ratios including working capital and
net worth ratios, and pays a .5% annual commitment fee on the unused credit.
The Company is in compliance with all terms of the agreement. As of June 30,
1997, no borrowings were outstanding under the credit line. At June 30, 1996,
$1,500,000 was outstanding and $3,200,000 was available for borrowing.
F-8
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 5 - INCOME TAXES
The provision (benefit) for income taxes includes the following:
YEAR ENDED JUNE 30,
------------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Current:
Federal $1,993 $1,246 $ 306
State 377 236 17
Foreign 4 9 12
------ ------ ------
2,374 1,491 335
------ ------ ------
Deferred:
Federal (347) (1,053) (66)
State (140) (184) -
------ ------ ------
(487) (1,237) (66)
------ ------ ------
$1,887 $254 $269
------ ------ ------
------ ------ ------
A reconciliation of income taxes computed by applying the federal statutory
income tax rate of 34% to income before income taxes to the total income tax
provision reported in the Consolidated Statement of Operations is as follows:
YEAR ENDED JUNE 30,
------------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Federal income tax at statutory rate $1,696 $1,160 $ 262
(Release of) increase in valuation allowance - (997) 48
State income taxes, net of federal benefit 156 165 11
Foreign sales corporation benefit (68) (65) (8)
Research and development credits - - (39)
Permanent differences 32 - -
Other 71 (9) (5)
------ ------ ------
Provision for income taxes $1,887 $ 254 $ 269
------ ------ ------
------ ------ ------
During the fiscal year ended June 30, 1996, the Company reduced the deferred tax
valuation allowance by $997,000 to recognize deferred tax assets. Based on
management's assessment and the Company's history of profitability, management
believes it is more likely than not that the deferred tax asset will be realized
through future taxable earnings or alternative tax strategies.
F-9
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Deferred income taxes at June 30, 1997 and 1996 comprised:
JUNE 30,
---------------------
1997 1996
------ ------
(IN THOUSANDS)
Deferred tax assets:
Inventory $ 805 $ 570
Allowance for doubtful accounts and returns 331 195
Warranty reserves 202 141
Vacation and deferred compensation 193 170
License fee accrual 69 101
Intangible assets 139 97
State income taxes 122 80
Other 21 71
------ ------
Gross deferred tax asset 1,882 1,425
------ ------
Deferred tax liabilities:
Property and equipment depreciation (62) (92)
------ ------
Gross deferred tax liability (62) (92)
------ ------
Valuation allowance - -
------ ------
Net deferred income taxes $1,820 $1,333
------ ------
------ ------
NOTE 6 - CONVERTIBLE REDEEMABLE PREFERRED STOCK
At June 30, 1996, the Company had outstanding three series of preferred stocks
which had no par value and were stated in the balance sheet at their original
issue price, which was equivalent to their redemption value. Upon completion of
the Company's initial public offering on February 21, 1997, all outstanding
shares of the preferred stock converted into 2,092,764 shares of common stock on
a one-for-one basis. Thereafter, no shares of preferred stock were authorized,
issued or outstanding.
NOTE 7 - STOCK-BASED COMPENSATION
STOCK OPTIONS
The Company has a number of stock option plans, administered by the Compensation
Committee of the Board of Directors, which provide for the issuance of options
to employees, officers and directors. The exercise price of a stock option is
generally equal to the fair market value of the Company's common stock on the
date the option is granted. Certain of the plans permit options granted to
qualify as "Incentive Stock Options" under the Internal Revenue Code while other
plans are specified as non-qualified. Additionally, certain of the
non-qualified plans call for 100% vesting of outstanding options upon a change
of control of the Company. Options generally vest at a rate of 25 percent per
year over a period of four years from the date of grant and expire after a
period not to exceed ten years, except in the event of termination, whereupon
vested shares must be exercised within 30 days, or upon death or disability,
where a six month exercise period is specified.
F-10
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Option activity for the three years ended June 30, 1997 is summarized as
follows:
SHARES SHARE PRICE
-------- ------------
Options outstanding at June 30, 1994 916,248 $ .12 - .80
Options granted 285,950 .80 - .88
Options exercised (39,040) .42 - .80
Options canceled (124,799) .12 - .80
--------- ------------
Options outstanding at June 30, 1995 1,038,359 .12 - .88
Options granted 184,810 2.00
Options exercised (280,481) .12 - .80
Options canceled (94,092) .80 - 2.00
--------- ------------
Options outstanding at June 30, 1996 848,596 .12 - 2.00
Options granted 100,000 3.00 - 6.19
Options exercised (168,630) .20 - 2.00
Options canceled (23,775) .80 - 6.19
--------- ------------
Options outstanding at June 30, 1997 756,191 $ .12 - 6.19
--------- ------------
--------- ------------
The following table summarizes all options outstanding and exercisable by price
range as of June 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ---------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISABLE OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
PRICES JUNE 30, 1997 LIFE PRICE JUNE 30, 1997 PRICE
- ------------ -------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ .12 - .88 496,391 5.6 years $ .60 398,305 $ .55
$2.00 - 3.00 246,800 8.6 2.32 40,199 2.00
$4.50 - 6.19 13,000 9.5 5.02 1,500 6.19
- ------------ ------- -------
$ .12 - 6.19 756,191 440,004
- ------------ ------- -------
- ------------ ------- -------
</TABLE>
Shares available for future grant were 446,457 and 566,382 at June 30, 1997 and
1996, respectively.
F-11
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
1996 EMPLOYEE STOCK PURCHASE PLAN
In February 1997, the Company adopted the 1996 Employee Stock Purchase Plan
(the "ESPP") whereby 250,000 shares of common stock were reserved for
issuance and purchase by employees of the Company to assist them in acquiring
a stock ownership interest in the Company and to encourage them to remain
employees of the Company. The ESPP is intended to qualify under Section 423
of the Internal Revenue Code and permits eligible employees to purchase
common stock at a discount through payroll deductions during specified
six-month offering periods. No employee may purchase more than $25,000 worth
of stock in any calendar year or 1,500 shares in any one offering period. The
ESPP is administered by an Administrative Committee appointed by the Board of
Directors and provides generally that the purchase price must not be less
than 85% of the fair market value of the common stock on the first or last
day of the offering period, whichever is lower. As of June 30, 1997, no
shares have been purchased under the ESPP because the first offering period
had not yet concluded.
PRO FORMA INFORMATION
The Company accounts for stock-based compensation using the intrinsic value
method. No compensation expense has been recognized for purchase rights
under the ESPP or for its stock option grants, which are fixed in nature and
have been granted at fair market value at the date of grant. Had
compensation expense for the Company's stock-based compensation awards issued
during 1997 and 1996 been determined based on the fair value at the grant
dates of awards using the method prescribed by SFAS No. 123, the Company's
net income and net income per share would have been reduced to the pro forma
amounts indicated below:
YEAR ENDED JUNE 30,
-------------------
1997 1996
-------- -------
(in thousands except per share amounts)
Net income:
As reported $ 3,100 $3,159
Pro forma 3,022 3,154
Net income per share:
As reported $ .34 $ .40
Pro forma .33 .40
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The weighted average estimated fair
value of employee stock options granted during 1997 and 1996 was $1.04 and
$0.49 per share, respectively. The weighted average assumptions used for
grants during the years ended June 30, 1997 and 1996 were: no dividend yield
for both years, risk-free interest rates of 6.6% and 5.7%, respectively,
expected volatility of 33% post-IPO and no volatility pre-IPO, and expected
lives of 5.0 years for both years.
The fair value of each share purchase right under the ESPP is estimated at
the inception of each offering period also using the Black-Scholes option
pricing model. The weighted average estimated fair value of each share
purchase right granted during 1997 was $2.49 per share. The weighted average
assumptions used were: no dividend yield, risk-free interest rate of 5.1%,
expected volatility of 33%, and an expected life of 6 months.
NOTE 8 - 401(k) PLAN
In January 1994, the Company adopted an employee savings and retirement plan
(the "401(k) Plan") covering all of the Company's employees. The 401(k) Plan
permits but does not require matching contributions by the Company on behalf
of all participants. No such contributions were made during fiscal 1997,
1996 or 1995.
F-12
<PAGE>
OVERLAND DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 9 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases its office, production and sales facilities under
non-cancelable operating leases which expire in various years through fiscal
2002. The leases provide for annual rent escalations intended to approximate
increases in cost of living indices, and certain of the leases provide for rent
abatement. At June 30, 1997, future minimum lease payments under these
arrangements are as follows:
MINIMUM
YEAR ENDING LEASE
JUNE 30, PAYMENTS
----------- --------
(in thousands)
1998 $ 886
1999 937
2000 964
2001 1,003
2002 1,043
Thereafter 160
------
$4,993
------
------
Rental expense is recognized ratably over the respective lease terms and
aggregated $703,000, $554,000 and $562,000 for fiscal 1997, 1996 and 1995,
respectively.
CONTINGENCIES
The Company, its directors and certain of its officers have been named as
defendants in two putative class action lawsuits filed on April 21, 1997 and May
2, 1997 in the U.S. District Court for the Southern District of California. In
both cases, the plaintiffs purport to represent a class of all persons who
purchased the Company's common stock between February 21, 1997 and March 14,
1997. The complaints allege that the defendants violated various federal
securities laws through material misrepresentation and omissions in connection
with the Company's initial public offering and its registration statement on
Form S-1 filed with the Securities and Exchange Commission on February 21, 1997.
The suits seek rescission of their share purchases or rescissory damages if
their shares have been sold, as well as attorney's fees and other costs and
expenses.
The outcome of the lawsuits cannot be determined. However, management believes
that it has meritorious defenses and intends to defend against the suits
vigorously. The Company maintains directors' and officers' liability insurance
to provide coverage against suits of this nature. Other than legal fees
incurred to date, no amounts have been recorded in the financial statements for
any losses which may result from these lawsuits.
F-13
<PAGE>
OVERLAND DATA, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
August 4, 1997
To the Board of Directors and
Shareholders of Overland Data, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) of this Form 10-K present fairly, in
all material respects, the financial position of Overland Data, Inc. and its
subsidiaries at June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Diego, California
F-14
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
OF YEAR INCOME DEDUCTIONS* END OF YEAR
---------- ---------- ----------- ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE:
- -------------------------------------------
1997 $ 624 $ 280 $130 $ 774
1996 446 333 155 624
1995 297 211 62 446
ALLOWANCE FOR INVENTORY OBSOLESCENCE:
- -------------------------------------
1997 $1,318 $ 968 $407 $1,879
1996 505 1,050 237 1,318
1995 242 933 670 505
- ----------------
* Deductions represent amounts written off against the allowance, net of
recoveries.
<PAGE>
EXHIBIT INDEX
3.1 Registrant's Amended and Restated Articles of Incorporation.*
3.2 By-Laws.*
4.1 Specimen stock certificate.*
4.2 Investors' Rights Agreement, dated May 21, 1993, between the Registrant
and the parties named therein.*
10.1 Basic Order Agreement #16529, dated July 1, 1993 and as amended through
November 10, 1995, between the Registrant and Digital Equipment
Corporation.*
10.2 Production Procurement Agreement #RMSS-ODI-96-01-0, dated October 25,
1996, between the Registrant and International Business Machines
Corporation.*
10.3 Credit Agreement effective as of June 27, 1997 between the Registrant and
Imperial Bank.
10.4 Standard Industrial Lease--Multi-Tenant, dated May 26, 1993, between the
Registrant and Mitsui/SBD America Fund 87-1.*
10.5 First Amendment to the 1995 Stock Option Plan dated January 21, 1997. *
10.6 1996 Employee Stock Purchase Plan adopted December 12, 1996.*
11.1 Statement Re: Computation of Earnings Per Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
24.1 Power of Attorney (included on Signature Page).
27.1 Financial Data Schedule (for EDGAR use only).
- ---------------------
* Incorporated by reference to the Company's Registration Statement
No. 333-18583 dated February 21, 1997.
<PAGE>
IMPERIAL BANK
CREDIT AGREEMENT
This Agreement is made by and between Overland Data, Inc. ("Borrower") and
Imperial Bank, a California banking corporation, ("Bank").
In consideration of mutual covenants and conditions hereof, the parties
hereto agree as follows:
1. REPRESENTATIONS OF BORROWER
Borrower represents and warrants that:
1.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and
existing and in good standing under the laws of California, without limit as to
the duration of its existence and is authorized and in good standing to do
business in the State of California; Borrower has corporate powers and adequate
authority, rights and franchises to own its property and to carry on its
business as now conducted, and is duly qualified and in good standing in each
State in which the character of the properties owned by it therein or the
conduct of its business makes such qualification necessary; and Borrower has the
power and adequate authority to make and carry out this Agreement.
1.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, as the case may be, and this Agreement is
the valid, binding and legally enforceable obligation of Borrower in accordance
with its terms; subject only to bankruptcy, insolvency or similar laws affecting
creditors rights generally.
1.03 NO CONFLICT. The execution, delivery and performance of this Agreement
are not in contravention of or in conflict with any agreement, indenture or
undertaking to which Borrower is a party or by which it or any of its property
may be bound or affected, and do not cause any lien, charge or other encumbrance
to be created or imposed upon any such property by reason thereof.
1.04 LITIGATION. Aside from those items listed in the attached Schedule A,
there is no litigation or other proceeding pending or threatened against or
affecting Borrower which if determined adversely to Borrower or its interest
would have a material adverse effect on the financial condition of Borrower,
and Borrower is not in default with respect to any order, writ, injunction,
decree or demand of any court or other governmental or regulatory authority.
1
<PAGE>
CREDIT AGREEMENT
JUNE 27, 1997
1.05 FINANCIAL CONDITION. The balance sheet of Borrower as of May 31,
1997, a copy of which has heretofore been delivered to Bank by Borrower, and
all other statements and data submitted in writing by Borrower to Bank in
connection with this request for credit are true and correct, and said
balance sheet truly presents the financial condition of Borrower as of the
date thereof, and has been prepared in accordance with generally accepted
accounting principles on a basis consistently maintained. Since such date,
there have been no material adverse changes in the financial condition of
business of Borrower. Borrower has no knowledge of any liabilities,
contingent or otherwise, at such date not reflected in said balance sheet,
and Borrower has not entered into any special commitments or substantial
contracts which are not reflected in said balance sheet, other than in the
ordinary and normal course of its business, which may have a materially
adverse effect upon its financial condition, operations or business as now
conducted.
1.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section 3.03 hereof and/or listed in the attached Schedule B.
1.07 TAX STATUS. Borrower has no liability for any delinquent state, local
or federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
1.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
1.09 REGULATION U. None of the proceeds of any loan from the Bank to
Borrower shall be used to purchase or carry margin stock (as defined within
Regulation U of the Board of Governors of the Federal Reserve system).
2. AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, under
borrowings, or other indebtedness, it will, unless Bank shall otherwise consent
in writing:
2.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2
<PAGE>
CREDIT AGREEMENT
JUNE 27, 1997
2.02 INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment and as to property insurance have Bank named as loss payee in an
Lenders "Loss Payable" Endorsement Form 438BFU or equivalent.
2.03 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
a. The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
b. It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by
it adequate with respect thereto.
2.04 FINANCIAL COVENANTS.
a. TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not
less than $30,000,000.00. "Tangible Net Worth" is defined as the
excess of all assets (excluding any value for goodwill, trademarks,
patents, copyrights, organization expense and other similar intangible
items), over all liabilities.
b. WORKING CAPITAL. Maintain a minimum Working Capital of
$25,000,000.00. "Working Capital" is defined as the excess of current
assets over current liabilities.
c. CURRENT RATIO. Maintain a ratio of current assets to current
liabilities of 2.0:1.
d. LEVERAGE. Maintain a maximum ratio of total debt to Tangible
Net Worth of 1.0:1.
3
<PAGE>
CREDIT AGREEMENT
JUNE 27, 1997
2.05 RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit Bank's representatives to have access to,
and to examine its properties, books and records at all reasonable times and
upon reasonable notice during normal business hours; and furnish Bank:
a. QUARTERLY FINANCIAL STATEMENT. Within forty-five (45) days after
the close of each quarter of each fiscal year of Borrower, commencing
with the quarter next ending, a balance sheet, profit and loss
statement, and a reconciliation of Borrower's capital accounts, as of
the close of such period and covering operations for the portion of
Borrower's fiscal year ending on the last day of such period, all in
reasonable detail, prepared in accordance with generally accepted
accounting principles on a basis consistently maintained by Borrower
and certified by an appropriate officer of Borrower;
b. ANNUAL FINANCIAL STATEMENT. As soon as available, and in any
event within ninety (90) days after the close of each fiscal year of
Borrower, a report of Company as of the close of and for each fiscal
year, all in reasonable detail, prepared on an audited basis by an
independent certified public accountant selected by Borrower and
reasonably acceptable to Bank, in accordance with generally accepted
accounting principles on a basis consistently maintained by Borrower
and certified by an appropriate officer of Borrower;
c. OTHER INFORMATION. Such other information relating to the affairs
of Borrower as the Bank reasonably may request from time to time;
d. MANAGEMENT LETTER. In connection with each fiscal year end
financial statement furnished to Bank hereunder, any management letter
of Borrower's independent certified public accountant.
2.06 NOTICE OF DEFAULT. Promptly notify Bank in writing of the occurrence
of any Event of Default hereunder ("Event of Default") or any event which upon
notice and lapse of time would be an Event of Default.
4
<PAGE>
CREDIT AGREEMENT
JUNE 27, 1997
2.07 OPERATING ACCOUNTS. Maintain all primary U.S. accounts and banking
relationship with Bank during the term of any loans from Bank to Borrower.
Borrower shall maintain, or cause to be maintained, on deposit with Imperial
Bank, non-interest bearing demand deposit balances sufficient to compensate Bank
for all services provided by Bank. Balances shall be calculated after reduction
for the reserve requirement of the Federal Reserve Board and uncollected funds.
Any deficiencies shall be charged directly to the Borrower on a monthly basis.
2.08 ATTORNEY'S FEES. Pay promptly to Bank without demand after notice,
with interest thereon from the date of expenditure at the rate applicable to any
loans from Bank to Borrower, reasonable attorneys' fees and all costs and
expenses paid or incurred by Bank in collecting or compromising any such loan
after the occurrence of an Event of Default, whether or not suit is filed. If
suit is brought to enforce any provision of this Agreement, the prevailing party
shall be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
3. NEGATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, it will not,
without Bank's written consent (which Bank shall not unreasonably withhold):
3.01 TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the
character of its business; or make any change in its Chief Executive Officer or
Chief Financial Officer.
3.02 PRIMARY LENDING RELATIONSHIP. Establish its primary lending
relationship with any entity other than Bank.
3.03 LIENS AND ENCUMBRANCES. Other than in the ordinary course of business
and consistent with past practices, create, incur, or assume any mortgage,
pledge, encumbrance, lien or charge of any kind upon any asset now owned, other
than liens for taxes not delinquent and liens in Bank's favor, except for those
already existing as of May 31, 1997.
3.04 LOANS, SECONDARY LIABILITIES. Make any loans or advances to any
person or other entity other than in the ordinary and normal course of its
business and consistent with past practices; or guarantee or otherwise become
liable upon the obligation of any person or other entity, except by endorsement
of negotiable instruments for deposit or collection in the ordinary and normal
course of its business and consistent with past practices.
5
<PAGE>
CREDIT AGREEMENT
JUNE 27, 1997
3.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Except in
the ordinary course of business, purchase or otherwise acquire assets or
business of any person or other entity with an acquisition price in excess of
$1,000,000.00; or liquidate, dissolve, merge or consolidate, or commence any
proceedings therefor; or sell any significant assets except in the ordinary
course of its business as now conducted; or sell, lease assign or transfer any
substantial part of its business or fixed assets, or any property or other
assets necessary for the continuance of its business as now conducted, including
without limitation the selling of any dividends, property or other asset
accompanied by the leasing back of the same.
4. EVENTS OF DEFAULT
The occurrence of any of the following Events of Default shall, at Bank's
option, terminate Bank's commitment to lend and make all sums of principal and
interest then remaining unpaid on all Borrower's indebtedness to Bank
immediately due and payable, all without demand, presentment or notice, all of
which are hereby expressly waived:
4.01 FAILURE TO PAY. Failure to pay any installment of principal or
interest on any indebtedness of Borrower to Bank within 15 days of any due date.
4.02 BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement binding upon Borrower.
4.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties
made herein or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in any
respect.
4.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
4.05 JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of
attachment, or similar process shall be entered or filed against Borrower or any
of its assets and shall remain unvacated, unbonded or unstayed for a period
later than five days prior to the date of any proposed sale thereunder.
6
<PAGE>
CREDIT AGREEMENT
JUNE 27, 1997
4.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
5. CREDIT COMMITMENT
5.01 REVOLVING CREDIT COMMITMENT. Bank agrees to make available to Borrower
a revolving credit line of $5,000,000 (the "Revolving Credit Commitment").
5.02 DIRECT DRAWINGS. Borrower may draw up to $5,000,000 in direct drawings
under the Revolving Credit Commitment.
5.03 LETTERS OF CREDIT. Borrower may utilize up to $5,000,000 in
documentary or standby letters of credit under the Revolving Credit Commitment.
No letter of credit shall expire later than the maturity date of the Revolving
Credit Commitment.
5.04 BANKERS' ACCEPTANCES. As a sublimit within the Revolving Credit
Commitment, Bank will issue up to $4,000,000 in Bankers' Acceptance in minimum
increments of $250,000, with tenor not to exceed 90 days and to be discounted
at Bank's then prevailing Bankers' Acceptance rate plus 225 basis points.
5.05 TOTAL AVAILABILITY. The total direct drawings, letters of credit and
Bankers' Acceptance shall not, at any one time, exceed the Revolving Credit
Commitment.
5.06 UNUSED CREDIT COMMITMENT. Borrower shall pay a 0.50% per annum
non-utilization fee on the unused portion of the Revolving Credit Commitment
on a quarterly basis, in arrears. However, if Borrower maintains average
collected balances in excess of collected balances required to compensate
Bank for depository services rendered, in an amount equal to 10% of the
average Unused Credit Commitment during any quarter, Bank shall waive the
non-utilization fee for that quarter.
5.07 CONSECUTIVE ANNUAL OUT OF DEBT PERIOD. Borrower shall maintain a zero
balance on the Revolving Credit Commitment for at least 30 consecutive days
during each Borrower fiscal year.
7
<PAGE>
CREDIT AGREEMENT
JUNE 27, 1997
6. MISCELLANEOUS PROVISIONS
6.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
Bank or any holder of any note issued by Borrower to Bank, in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege. All rights and remedies existing under this Agreement or any note
issued in connection with a loan that Bank may make hereunder, are cumulative
to, and not exclusive of, any rights or remedies otherwise available.
6.02 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
6.03 INUREMENT. The benefits of this Agreement shall inure to the
successors and assigns of Bank and the permitted successors and assigns of
Borrower.
6.04 APPLICABLE LAW. This Agreement and all other agreements and
instruments required by Bank in connection therewith shall be governed by and
construed according to the laws of the State of California, to the jurisdiction
of whose courts the parties hereby agree to submit.
6.05 OFFSET. In addition to and not in limitation of all rights of offset
that Bank or other holder of any note issued by Borrower in favor of Bank may
have under applicable law, Bank or other holder of such notes shall, upon the
occurrence of any Event of Default or any event which with the passage of time
or notice would constitute such an Event of Default, have the right to
appropriate and apply to the payment of the outstanding under any such note any
and all balances, credits, deposits, accounts or monies of Borrower then or
thereafter with Bank or other holder, within ten (10) days after the Event of
Default, and notice of the occurrence of any Event of Default by Bank to
Borrower.
6.06 SEVERABILITY. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
8
<PAGE>
CREDIT AGREEMENT
JUNE 27, 1997
6.07 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of
this Agreement and of every part hereof.
6.08 ACCOUNTING. All accounting terms shall have the meanings applied under
generally accepted accounting principles unless otherwise specified.
6.09 REFERENCE PROVISION. a. Other than (1) nonjudicial foreclosure and all
matters in connection therewith regarding security interests in real or personal
property; or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Note ("Agreement"), which controversy, dispute or
claim is not settled in writing within thirty (30) days after the "Claim Date"
(defined as the date on which a party subject to the Agreement gives written
notice to all other parties that a controversy, dispute or claim exists), will
be settled by a reference proceeding in California in accordance with the
provisions of Section 638 ET SEG. of the California Code of Civil Procedure
("CCP"), or their successor section, which shall constitute the exclusive remedy
for the settlement of any controversy, dispute or claim concerning this
Agreement, including whether such controversy, dispute or claim is subject to
the reference proceeding and except as set forth above, the parties waive their
rights to initiate any legal proceedings against each other in any court or
jurisdiction other than the Superior Court in the County where the Real
Property, if any, is located or Los Angeles County if none (the "Court"). The
referee shall be a retired Judge of the Court selected by mutual agreement of
the parties, and if they cannot so agree within forty-five (45) days after the
Claim Date, the referee shall be promptly selected by the Presiding Judge of the
Court (or his representative). The referee shall be appointed to sit as a
temporary judge, with all of the powers of a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of office as
provided for in Rule 244 of the California Rules of Court (or any subsequently
enacted Rule). Each party shall have one peremptory challenge pursuant to CCP
Section 170.6. The referee shall (a) be requested to set the matter for hearing
within sixty (60) days after the Claim Date and (b) try any and all issues of
law or fact and report a statement of decision upon them, if possible, within
ninety (90) days of the Claim Date. Any decision rendered by the referee will be
final, binding and conclusive and judgment shall be entered pursuant to CCP
Section 644 in any court in the State of California having jurisdiction. Any
party may apply for a reference proceeding at any time after thirty (30) days
following the notice to any other party of the nature of the controversy,
dispute or claim, by filing a petition for a hearing and/or trial. All discovery
permitted by this Agreement shall be completed no later than fifteen (15) days
before the first hearing date established by the referee. The referee may extend
such period in the event of a party's refusal to provide requested discovery for
any reason whatsoever, including, without limitation, legal objections raised to
such discovery
9
<PAGE>
CREDIT AGREEMENT
JUNE 27, 1997
or unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Court is empowered to issue temporary and/or provisional remedies, as
appropriate.
b. Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
c. The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the State of California. The rules
of evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of law, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
d. In the event that the enabling legislation which provides for appointment
of a referee is repealed (and no successor statute is enacted), any dispute
between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
10
<PAGE>
6.10 MODIFICATION. This Agreement may be modified only by a writing signed
by both parties hereto.
This Agreement is executed on behalf of the parties by duly authorized
representatives as of August 25, 1997, and is effective as of June 27,1997.
IMPERIAL BANK ("BANK")
By: s/s Mike Berrier
--------------------------------
Mike Berrier, Vice President
Date: September 22, 1997
--------------------------------
OVERLAND DATA, INC. ("BORROWER")
By: s/s Scott McClendon
--------------------------------
Scott McClendon, President
Date: September 19, 1997
--------------------------------
11
<PAGE>
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED
JUNE 30,
------------------------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Net income $3,100 $3,159 $ 501
------ ------ ------
Weighted average number of common
stock shares outstanding 7,053 4,570 3,968
Weighted average number of
preferred stock shares
outstanding 1,478 2,602 2,934
Common stock equivalents from the
issuance of options using the
treasury stock method 560 490 315
Cheap stock adjustment 131 195 195
------ ------ ------
Shares used in computing net
income per share 9,222 7,857 7,412
------ ------ ------
Net income per share $ 0.34 $ 0.40 $ 0.07
------ ------ ------
------ ------ ------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Place of
Name of Subsidiary Incorporation
- ------------------ --------------
Overland Data (Europe) Limited United Kingdom
Overland Data Export Limited Barbados
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-22217) of Overland Data, Inc. of our report dated
August 4, 1997, appearing on page F-14 of this Form 10-K.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
San Diego, CA
September 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
CONDENSED STATEMENT OF OPERATIONS FOR THE 12 MONTHS ENDED JUNE 30, 1997, THE
CONSOLIDATED CONDENSED BALANCE SHEET AS OF JUNE 30, 1997, & THE CONSOLIDATED
CONDENSED STATEMENT OF CASH FLOWS FOR THE 12 MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 18,926
<SECURITIES> 0
<RECEIVABLES> 11,151
<ALLOWANCES> 0
<INVENTORY> 12,101
<CURRENT-ASSETS> 44,528
<PP&E> 3,499
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,260
<CURRENT-LIABILITIES> 7,795
<BONDS> 0
0
0
<COMMON> 33,246
<OTHER-SE> 7,071
<TOTAL-LIABILITY-AND-EQUITY> 48,260
<SALES> 59,146
<TOTAL-REVENUES> 0
<CGS> 38,775
<TOTAL-COSTS> 38,775
<OTHER-EXPENSES> 15,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 185
<INCOME-PRETAX> 4,987
<INCOME-TAX> 1,887
<INCOME-CONTINUING> 3,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,100
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
